Drought Is Bringing The Next Food Price Shock

Drought in the United States, past and present, might make 2014 one of the more volatile years for food prices and supplies globally. U.S. consumers may get a preview of what's coming at the salad bar.

The main culprit is the parched land of California's Central Valley, which grows a large share of U.S. vegetables, fruits and nuts. Conditions are so dry that some farmers aren't even bothering to plant. That might have even bigger implications for food prices than the 2012 drought that baked the Corn Belt, U.S. Agriculture Secretary Tom Vilsack says.

California has suffered a double hit: a dearth of rain in the lowlands and a lack of snow in the mountains in the north and east. Snowmelt provides water for many of the state's farmers during the growing season and for the huge population centers in the south. Snow this year was only about 30 percent of the historical average. Even though the snow now is melting, some streams and rivers have so little water that wildlife crews have had to truck stranded salmon fingerlings downstream so they can make it out to sea.

The harshest winter weather in more than three decades in the Midwest and Northeast also will send shock waves through the food chain, according to the Wall Street Journal. Kansas's winter wheat crop took a beating, as did vineyards for producing wine grapes in New York's Finger Lakes region.

The U.S. Department of Agriculture had projected a 2.5 percent to 3.5 percent rise in the price of fresh fruits and vegetables this year. That estimate, however, was made before the full extent of the damage from the winter weather and California's drought could be assessed.

The rise in commodities indexes since the start of the year has been about 20 percent, reflecting higher prices for hogs, steers, lard and wheat. Because of the 2012 drought, farmers slaughtered huge numbers of cattle and hogs as feed costs soared. All that extra meat on the market helped keep a lid on prices in 2013. But now, the U.S. cattle herd is at a 63-year low (hogs are at a seven-year low). The smaller supply of animals ready for slaughter plus the expectation of higher feed costs have sent prices soaring.

Of course, no one consumes steers per se, so diners won't pay one-fifth more for steak just because of the increase in commodity prices. The cost of growing food accounts for only about 15 cents of every $1 we spend on it. The rest goes to processing, packaging, marketing and transportation.

And even if prices rise more than the USDA forecasts, the latest economic reports suggest they might most U.S. consumers are in a position to cope by spending less on other goods or switching to other types of food. In other words, going to fewer movies or purchasing less beef and more chicken, the price of which has risen much less than beef this year.

What bears watching isn't so much what increased prices mean in the United States, which has the world's cheapest food, or other developed nations, but the implications for poorer countries. In much of the world, consumers devote a far larger share of personal income to food.

Just eyeball a map of the world and the hot spots tend to be where rising food costs intersect with corruption and ineffectual government. Many analysts cite the rise in prices for staples such as bread as the trigger for the Arab Spring uprisings. Food shortages also figure in the unrest in Venezuela.

The U.S. is the world's biggest food exporter by a wide margin. Whatever happens to domestic prices won't be confined to U.S. shores.

James Greiff is an editorial board member of Bloomberg View, where this first appeared.